Germany's government-planned "early-start pension" (Frühstart-Rente) can make a considerable contribution to boosting retirement provision, according to an analysis by the consumer advice service Finanztip. The analysis also positively assesses the fact that state contributions will be provided in any case, even if the child's parents do not submit an application for them. The analysis was made available to the news agency AFP in Berlin on Friday.
According to the draft, the government will contribute ten euros per month to a certified retirement savings product until the child’s 18th birthday. It also provides that that parents can top up the state payments with their own funds by up to 6,840 euros per year. During the savings phase, returns remain tax-free, and the state contributions are not subject to income tax. Parents can open the account with a private provider of their choice.
The Ministry of Finance stipulates an effective cost cap of one percent. In addition, no origination or distribution fees may be charged until the child turns 18. The state subsidy is to be applied for automatically through the provider of the retirement account.
The early-start pension is set to begin with the birth cohort of 2020, retroactively from January 1, 2026. From 2027 onward, the cohort of children turning six that year will be added annually. Contracts can also be concluded for earlier birth cohorts of children under 18, though without state contributions. To receive the state support, children must also have their place of residence in Germany. Payouts are possible from the completion of the 65th year of life.
If parents do not open their own savings custody account for their child, the money will, according to the draft law, initially flow into a newly created special fund of the federal government, managed by the Bundesbank and invested broadly across the capital market. From the age of majority and up to the age of 25 at the latest, those affected can transfer the accumulated assets into their own certified retirement provision contract or a retirement savings custody account.
If only the state contributions of ten euros per month, starting from a child's sixth year of life, were saved up until the 18th birthday, this would result in a sum of 1,440 euros. With an average annual return of six percent, minus costs of 0.2 percent, this would grow to an amount of 2,200 euros, according to the analysis.
If this money were then transferred into a retirement savings custody account, an additional sum of around 25,000 euros would be available by the time of retirement, the analysis continued. "Ten euros a month won't close a pension gap. But it can be the starting signal for decades of wealth accumulation," explained Finanztip's editor-in-chief, Hermann-Josef Tenhagen.
Tenhagen described the plan to provide state funds even without an application as a "genuine paradigm shift." This means the support for children is preserved even if their parents initially do nothing. "This ensures greater equality of opportunity and is a good approach for modern retirement provision." According to the current legislative plans, entitlement to the support is to be automatically linked to the receipt of child benefit (Kindergeld).
Finanztip is critical of the planned cost cap of up to one percent per year. "One percent in ongoing costs is significantly too high. Globally diversified passive equity ETFs are already available today for around 0.2 percent per year," Tenhagen explained. Over an investment period of 60 or 70 years, more expensive products would burden savers with unnecessary costs running into the tens of thousands of euros.
From breaking news to thought-provoking opinion pieces, our newsletter keeps you informed & engaged.
By subscribing, you agree to our Terms & Conditions and Privacy Policy.
